What is called to the ability of a country to produce more output than another country?
And How Has the Global Economy Shaped the United States? Show
After centuries of technological progress and advances in international cooperation, the world is more connected than ever. But how much has the rise of trade and the modern global economy helped or hurt American businesses, workers, and consumers? Here is a basic guide to the economic side of this broad and much debated topic, drawn from current research.Globalization is the word used to describe the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information. Countries have built economic partnerships to facilitate these movements over many centuries. But the term gained popularity after the Cold War in the early 1990s, as these cooperative arrangements shaped modern everyday life. This guide uses the term more narrowly to refer to international trade and some of the investment flows among advanced economies, mostly focusing on the United States. The wide-ranging effects of globalization are complex and politically charged. As with major technological advances, globalization benefits society as a whole, while harming certain groups. Understanding the relative costs and benefits can pave the way for alleviating problems while sustaining the wider payoffs. Your browser does not support this video Today, Americans rely on the global economy for many of the things they buy and sell, and to expand their businesses and make investments. Many products and services have become affordable to the average American through the coordination of production across countries. Today, Americans rely on the global economy for many of the things they buy and sell, and to expand their businesses and make investments. Many products and services have become affordable to the average American through the coordination of production across countries. The global economy moves fast. We help you navigate it.The Peterson Institute for International Economics (PIIE) is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions. Subscribe to the PIIE Insider Weekly NewsletterTHE HISTORY OF GLOBALIZATION IS DRIVEN BY TECHNOLOGY, TRANSPORTATION, AND INTERNATIONAL COOPERATIONSince ancient times, humans have sought distant places to settle, produce, and exchange goods enabled by improvements in technology and transportation. But not until the 19th century did global integration take off. Following centuries of European colonization and trade activity, that first “wave” of globalization was propelled by steamships, railroads, the telegraph, and other breakthroughs, and also by increasing economic cooperation among countries. The globalization trend eventually waned and crashed in the catastrophe of World War I, followed by postwar protectionism, the Great Depression, and World War II. After World War II in the mid-1940s, the United States led efforts to revive international trade and investment under negotiated ground rules, starting a second wave of globalization, which remains ongoing, though buffeted by periodic downturns and mounting political scrutiny. GLOBALIZATION IN CHARTSForeign direct investment (FDI) involves establishing ownership or controlling interest of a business in another country. Foreign direct investment (FDI) involves establishing ownership or controlling interest of a business in another country. China, India, and Brazil dropped their rates to enter the World Trade Organization (WTO). China, India, and Brazil dropped their rates to enter the World Trade Organization (WTO). Global supply chains are production networks that assemble products using parts from around the world (known as intermediate goods). Today, 80 percent of world trade is driven by supply chains run by multinational corporations. Trade in intermediate goods is now nearly twice as large as trade in final goods and is especially important in advanced manufacturing, like autos. Global supply chains are production networks that assemble products using parts from around the world (known as intermediate goods). Today, 80 percent of world trade is driven by supply chains run by multinational corporations. Trade in intermediate goods is now nearly twice as large as trade in final goods and is especially important in advanced manufacturing, like autos. The surplus in services suggests the competitive strength of US services in the global market. The United States had an overall trade deficit of $447 billion in 2017, according to the US International Trade Commission, as a result of Americans spending more than they earn and financing the difference with foreign credit. For more, watch the video, “Is the US Trade Deficit a Problem?” The surplus in services suggests the competitive strength of US services in the global market. The United States had an overall trade deficit of $447 billion in 2017, according to the US International Trade Commission, as a result of Americans spending more than they earn and financing the difference with foreign credit. For more, watch the video, “Is the US Trade Deficit a Problem?”
FAQ: What has been the role of international financial flows? Separate from trade in goods and services, global financial integration is a much-debated but important topic. Here is a quick summary.
Many countries have large international financial flows or investments, consisting of assets and liabilities. These include FDI, securities (which are bought and sold), and debts. They are generally held by or owed to firms, banks and other financial institutions, or governments. This chart shows how yearly US transactions grew over time as the global economy and financial system became increasingly integrated but dropped dramatically during the global financial crisis of 2008–09. (Total US foreign assets in 2016 were $26 trillion, equal to 140 percent of US GDP. Total US liabilities to foreigners were $34 trillion in 2016, or 185 percent of GDP.)
This chart shows how FDI has grown steadily while the growth of portfolio holdings (foreign equity or foreign debt) and “other” assets (which are largely composed of bank loans) has been more volatile. Reserves are international assets held by the US government.
This chart shows the collapse of financial inflows to South Korea during two periods, the 1997–98 Asian financial crisis and the global financial crisis of 2008–09, especially in “other liabilities” like bank loans. Korea was hit in 2008–09 even though the epicenter of the crisis was in the United States and Europe. “I saw that you could not separate the idea of commerce from the idea of war and peace. ... [and] that wars were often largely caused by economic rivalry conducted unfairly. ...I embraced the philosophy that…unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war. ...[I]f we could get a freer flow of trade—freer in the sense of fewer discriminations and obstructions—so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance for lasting peace.”Cordell Hull, Secretary of State under |
Trade actions | Risks |
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Engaging in a trade war, with escalating tit-for-tat tariffs |
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Withdrawing from free trade agreements |
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Violating WTO rules or circumventing established processes |
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Promoting “Buy America” policies |
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Imposing tariffs to save US manufacturing jobs at specific companies |
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Restricting imports from specific countries to try to reduce bilateral trade deficits |
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THE PUBLIC HAS MIXED VIEWS ON GLOBALIZATION
How do Americans feel about globalization? Listening to the debates can be confusing. Not surprisingly, polls vary widely depending on how and when the question is posed.
Globalization can be a hard sell to the public because the benefits are widely distributed and not as easily understood, compared with the personal costs to very specific companies or workers.
The problem is compounded because policymakers have done little to help workers and communities adjust at a time when the wealthiest Americans have gained the most in recent years. In general, younger people are more supportive of free trade, as most have never known a world without the current system.
Before 2016, Republicans generally favored US trade deals and Democrats generally voted against them. President Trump canceled TPP and threatened withdrawing from NAFTA, the Korea-US Free Trade Agreement (KORUS) (later revised and signed), and the WTO. His administration negotiated the US-Mexico-Canada Agreement (USMCA) to replace NAFTA; the agreement entered into force in 2020. Some GOP congressional members spoke out against Trump on certain trade issues (see example) or drafted bills to limit his authority on tariffs. The Trump administration pushed for more power to impose tariffs.
This Pew Research poll finds more support than not for free trade agreements. But a 2016 Bloomberg poll asked, “Do you think US trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices?" This resulted in 65 percent of respondents wanting more restrictions, the opposite of the sentiment expressed in the Pew poll.
This Pew Research poll finds more support than not for free trade agreements. But a 2016 Bloomberg poll asked, “Do you think US trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices?" This resulted in 65 percent of respondents wanting more restrictions, the opposite of the sentiment expressed in the Pew poll.
SUSTAINING GLOBALIZATION THROUGH POLICY ACTION
The global economy has yielded enormous economic gains for the United States, but problems undoubtedly remain. There are abuses within the system and rules need to be updated. Trade agreements should account for the modern digital age. Disputes continue on the trade of certain goods—whether items are flooding other markets too much, how industries are being subsidized, lingering protections on specific goods or economic sectors, etc. Solving these types of issues, which will inevitably arise and change over time, is best done through negotiation and coordination with trading partners—applying due process—in order to prevent costly trade wars, where more and more barriers end up hurting all sides.
But trade negotiations can only go so far. Not enough has been done to help those who have lost out from trade competition. And the reality is that the problems people face today go far beyond the effects of globalization. Manual work is increasingly being automated, lowering demand for workers. Wages are stagnant, as health care and higher education costs rise. Inequality is widening.
Domestic policies that support not just those left behind because of trade competition but all Americans will maximize gains while ensuring inclusive growth critical for national well-being and preventing erosion of multilateral systems that the United States helped build and that have served the country—and the world—well for most of the last century.
The global market still has great potential for the US economy. With anyone in the world now a text, click, call, or plane flight away, 95 percent of potential customers for goods and services are outside the United States, ready to buy goods and services from other countries if US producers are barred from their markets. If American producers want to reach those consumers, the United States must let producers from overseas reach American consumers, as they have over the years for cars, appliances, smartphones, and other products Americans want. More open trade could add another $540 billion to the US economy by 2025, equivalent to $1,600 a year in income per person.
Here are some of the crucial areas that economists have proposed the United States should focus on, as outlined in many studies at the Peterson Institute and other policy organizations. While these goals are simply stated and obviously will pose challenges to resolve, the stakes are high to rebuild trust in a global system that has helped secure prosperity and peace.
Invest in better and more inclusive education to prepare people for tomorrow’s economy.
Give all displaced workers sufficient financial and administrative support to find new jobs and some compensation for lost income.
Address growing income inequality through the tax system and spending programs.
Make sure the healthcare system does not impede workers from finding new jobs or cause significant financial hardship.
Use free trade agreements to improve the
competitiveness of US businesses, increase total trade, and boost overall economic growth.
Work within the WTO and various free trade agreements to settle disputes, ensure fairness, protect intellectual property and investment rights, and promote reciprocity and growth. Improve the rules of the system rather than abandon them.
Coordinate with allies to confront trade abuses.
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GLOSSARY
Goods are physical, produced items traded between countries, like corn, machinery parts, or chemicals.
Services are business activities conducted between countries, such as tourism, finance, insurance, real estate, science exchanges, professional services, business management, education, health care, arts, entertainment, accommodation, and food services.
Exports are goods and services that are sold to individuals or companies outside of their country of origin.
Imports are goods or services purchased from outside the country.
A trade deficit occurs when spending on imports exceeds what is earned from selling exports. A trade surplus is the opposite, when earnings from exports top spending on imports. A country’s trade balance, either a surplus or deficit, is not affected by tariffs or trade agreements but by larger economic factors, like government spending and monetary policy.
Protectionism is the term for government restrictions on international trade aimed at blocking foreign products and driving companies and consumers to purchase domestically produced goods and services. The government may enact taxes on imports (called tariffs), limits on the quantity of imports (called quotas), subsidies to domestic industries, or other regulations. Tariffs are paid by domestic importers, not foreign governments or exporters.
Trade liberalization is the opposite of protectionism—when countries allow people and businesses to buy and sell across borders with fewer restrictions. In this context, liberal refers to more free or open trade.
CREDITS
Written by Melina Kolb
Edited by Madona Devasahayam, Helen Hillebrand, and Steven R. Weisman
Graphics by William
Melancon
Videos by Daniel Housch
Chart data collected by Christopher G. Collins and Soyoung Han
Additional research by Anjali Bhatt, Cathleen Cimino-Isaacs, and Zhiyao (Lucy) Lu
Special thanks to C. Fred Bergsten, Chad P. Bown, Cullen S. Hendrix, Gonzalo Huertas, Gary Clyde Hufbauer, Douglas A. Irwin, Fredrick Toohey, Jeffrey J. Schott, and Eitan Urkowitz for their contributions.
This feature was first published on October 29, 2018 and last updated on August 24, 2021.
© 2021 Peterson Institute for International Economics. All rights reserved.
The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions. The Institute discloses all sources of funding, which comes through donations and grants from corporations, individuals, private foundations, and public institutions, as well as income on the Institute’s capital fund and from publishing revenues. Donors do not influence the conclusions or policy implications drawn from Institute research. All Institute research is held to strict standards of replicability and academic integrity. Visit piie.com to learn more.
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